Saturday, November 05, 2016
11:47:41 PM EDT

November Selling Arrived

by
Jim Brown

Once the calendar turned over to November and the start of a new fiscal year for mutual funds, the selling increased.

The S&P has been down for nine consecutive days but the pace of selling increased at the open on November 1st. This begins a new fiscal year for funds and they were free to undress the windows and raise cash to put to work after the election.

The S&P had a slight downward bias the prior week but the FBI announcement knocked it below support. Monday, the last day in the fiscal year was flat. When the bell rang on Tuesday morning, the selling began and the volume increased significantly. The average volume for the last four days was 7.65 million shares compares to 5.8-6.0 billion in the two weeks prior.

Friday saw a minor short squeeze at the open but that faded in the afternoon and all major indexes closed negative except for the Russell, Biotech Index and Dow Transports. The rebound in those indexes, two of which had been heavily sold, suggests the market may be looking for a bottom.

The Biotech Index came very close to support at 2,800 at Thursday's close but rallied nearly 2% on Friday despite some negative drug headlines. If the biotech sector is ready to rally, it would support the Russell and the Nasdaq. However, I seriously doubt it will happen until after the election. If Clinton wins, the biotechs could dip lower. If Trump wins, we should see a strong biotech, drug, healthcare rally.

The S&P-600 Small Cap Index found support at the 200-day average and it also posted a gain on Friday. The SP600 is one of the few indexes that actually respects the moving averages. The 200-day has been support and resistance for a long time. This suggests we could see some program buying here as long as the broader market is not imploding.

The nine days of decline on the S&P has pushed the oscillators well into negative territory. The S&P closed at the low of the day and just above the 200-day average at 2,085. While that has not been support in the past, the lack of any near term support from other sources could make that a potential support point on Monday. When there is nothing else around, traders tend to grasp at any available straw to support their thesis.

The internals on the S&P are nearing the lows for the year. The percentage of stocks over their 50-day average has fallen to 27% and the October low. The same indicator hit 22% in June and 9% in January.

The percentage of stocks over their 200-day average has fallen to 53.4% and exactly the same level as the Brexit low in June.

The dollar index fell to a four-week low with a whopping 2% decline from $99 to $96.85 for the week. Weak economics in the U.S. and stronger numbers out of China were partly to blame. The FBI announcement about Clinton started the decline and it was fairly rapid from that point forward.

The global markets also suffered with the Dow Jones Global Index falling -2% for the week and breaking well under support. The U.S. election is creating global uncertainty and portfolio managers are taking steps to reduce exposure ahead of the event.

The markets next week have only one inflection point. That is of course the election. I cannot remember an election that had such a potential for upheaval in multiple directions regardless of which candidate won.

This means Wednesday is more than likely going to be a massively directional day. If Clinton wins, we could move sharply higher as long as republicans maintain control of the House and a bigger move if they maintain control of the Senate as well. That would guarantee gridlock and maintenance of the status quo for at least two years. If Trump wins we could see the equivalent of a Brexit dip but I believe it would be bought just like we saw in June. Nothing will happen for months or even years if Trump is elected because he still has to get his proposals passed into law and there will be objections. That makes a Trump victory a sell the news event but managers will be quick to buy that dip once the smoke clears.